Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Thursday, 5 June 2014

Record high mortgage demand in May

Low interest rates fuelling investor demand

I suppose one of the problems with writing a blog about shares and property is that you run the risk of repeating yourself, which is of course, one of the problems with writing a blog about shares and property.

As regular readers will know, my view is that in the absence of high rates of unemployment in Australia and with our strident levels of population growth, property prices are likely to keep rising until interest rates are moved higher again.

The reasons are very simple.

Cash in the bank account is paying next to nothing after inflation and taxes. 

Aussies already have more exposure to the share markets than some of our developed country counterparts thanks to compulsory superannuation, and many were spooked by the GFC share price crash.

Instead of buying when the share markets are on sale, a great proportion of Aussies apear inclined to stick with "what they know" and plump instead for investment property.

With most mortgages being of the variable rate variety, the property markets are highly sensitive to interest rates, and in particular, with interest rates at record lows, one should expect to see investor demand at corresponding record highs.

AFG index

Australia's largest mortgage aggregator Australian Finance Group (AFG) released its mortgage index for May yesterday.

The index showed how the average mortgage size has picked up over the past year, largely driven by New South Wales and Victoria i.e. Sydney and Melbourne (click chart):

As noted above, with low interest rates, I'd expect to see many more investors.

Incredibly, some 49% of mortgage demand in New South Wales is for investment mortgages, while investor demand in Queensland is taking off apace, soon threatening to run as high as 40%, which is a very significantly increasing trend (click chart):

There's been plenty of questionable commentary around about property prices "falling" in May, with plenty less recognition of the shortcomings and seasonality of the index which spawned the supposed falls.

It's possible that price growth has flattened out somewhat, but it seems highly doubtful that falling prices make any sense on an aggregate basis given the rampant levels of demand still around.

May index breaks records

In any case, AFG's mortgage index released yesterday showed mortgage demand soaring to the highest level it has ever recorded in Australia. So I guess the market is pretty strong then (click chart):

Of the $4,200 million of mortgage demand in May, more than $1,300 million was for the state of New South Wakes alone, where demand is more than 25% higher than it was a year ago. This suggests to me that the Sydney market will remain very strong through 2014 (click chart):

That's pretty much my on-the-ground experience too, having been outbid for two properties in the last week, one of which went to a silly price.

There is more stock coming on to the market, but there is also masses of demand still there to soak it up.

That's why I believe dwelling prices will keep ticking up until mortgage rates revert higher.

RBA viewpoint

For all the talk of Reserve Bank intervention and the deployment of macroprudential measures, to my mind there has been barely a shred of evidence to suggest such from the RBA itself.

And, after all, it's the RBA's viewpoint that matters, not yours or mine.

Australia's central bank appears to remain the picture of sanguine calm as house prices continue to increase...